Property loan vs reverse mortgage

Many borrowers opt for home loans to buy a house or other property.

But such properties, once bought, can also be a source of funding for the property owner.

If you own immovable property such as a house and need funds, you can use the property to raise a loan. Such loans are of two types – loan against property and reverse mortgage loan. Both these types entail mortgage of the property to the lender. They also have other similarities such as the loan value being determined by the lender based on factors such as property value and loan-to-value. Also, use of loan proceeds for speculative purposes is not allowed. But loan against property and reverse mortgage loans differ in many respects - eligible borrowers, eligible properties, and repayment norms.

Salaried individuals, self-employed people and businesses can avail of loans against property for their personal or business use. Such properties can be residential or commercial.

Also, they could be self-occupied or rented out. Lenders usually stipulate that the maximum age of individuals and self-employed people who borrow against property should be 60 years, or they should be maximum 65 years of age at the time of loan maturity.

This implies that senior citizens are, in most cases, not eligible for loans against property. The borrower's income level is an important criterion used by lenders to assess repayment capacity and to determine loan eligibility. The borrower needs to repay the loan along with interest through periodic payments such as equated monthly instalments.

The tenure of loans against property is usually between 15 to 20 years. The interest rate on such loans is usually lower than that on personal loans, and is currently in the range of 14.5 per cent to 15.5 per cent.

Reverse Mortgage

In contrast to loans against property, reverse mortgage loans are targeted specifically at senior citizens. Only individuals aged 60 and above are eligible for these loans. Also, senior citizens can take reverse mortgage loans only against residential properties which they have self-acquired and self-occupy for the majority of the time. This means that reverse mortgage loans cannot be taken on inherited property and on residential property which has been rented out. Also, such loans cannot be taken on commercial property.

Another key difference in reverse mortgage loans is that instead of making regular payments towards the loan, the borrower receives regular cash inflows from the lender. Depending on the scheme chosen, such receipts can be for a maximum period of 20 years or it could continue for the life-time of the senior citizen. The senior citizen can occupy the house until his death. As long as the borrower lives in the house, he need not repay the loan. Repayment arises only on the demise of the senior citizen, or if he permanently moves out of the house.

In such cases, the senior citizen (if he is alive) or his legal heirs can choose to repay the loan along with interest to the lender. Else, the lender sells the property, adjusts the sale proceeds towards the loan outstanding and returns any excess amount to the senior citizen or his legal heirs.

Unlike loan against property, the borrower's eligibility for reverse mortgage loans does not depend on his income level. Interest rate on reverse mortgage loans offered by banks and housing finance companies is presently in the range of 12.5 per cent to 13.5 per cent, lower than that on loans against property.

anandk@thehindu.co.in

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